Corporate bonds and NCDs: how they work and what can go wrong

Corporate bonds and NCDs are loans you make to a company. It promises interest and your money back on a set date, but it can also pay late or not at all, and no deposit insurance covers that loss.

What are corporate bonds and NCDs?

A corporate bond is a loan you make to a company for a fixed period. In return, the company pays interest (the coupon) and returns your money at maturity, the date the loan ends. The borrower is the issuer.

In Indian law, a bond and a debenture are the same thing. The Companies Act says a debenture includes bonds and any other instrument of a company that shows a debt. An NCD, or non-convertible debenture, is a debenture that can never be turned into shares.

Statutory corporations and multilateral institutions may also issue such securities; government bonds fall outside them.

AMFI says corporate bonds carry a higher amount of credit risk than government securities, while RBI says government securities carry practically no risk of default. Credit risk is the chance that a borrower pays late or does not pay back. For coupons, yields and bond prices, read our guide to how bonds work.

How safe are corporate bonds?

A corporate bond is only as safe as the company's ability to pay, and no deposit insurance covers it. DICGC insures bank deposits up to ₹5 lakh per depositor per bank. A bond or NCD is not a bank deposit, so that cover does not apply.

What you have instead is a credit rating. It is a rating agency's opinion on how likely a debt is to be repaid in full and on time. SEBI's standard scale reads like this:

Investment grade means a rating of BBB- or higher. Default means the company has not paid interest or principal in full when due.

A rating has limits. It is not a recommendation to buy, hold or sell, and it does not measure liquidity risk (how easily you can sell) or interest-rate risk. Ratings can change quickly, and SEBI's investor guide says not to rely solely on them.

Every listed NCD must carry a rating from at least one SEBI-registered rating agency. The offer document, the paper that describes the issue, must show every rating the company got, including ones it chose not to use.

When interest rates rise, bond prices may fall, and the other way round.

What happens if a company defaults on its bonds?

A default is any interest or principal not paid in full on the day it falls due, even by a day. A listed company must tell the stock exchange within one working day of a payment falling due whether it paid. The debenture trustee then acts for holders.

An issuer must appoint a debenture trustee for every issue of debt securities. After a default, the process runs on set deadlines:

• The trustee writes to the investors within three days of the default.
• For listed NCDs first sold privately, it calls a meeting of holders within 30 days of the default, unless the company pays first. Holders vote on enforcing the security. For NCDs sold in a public issue, that vote and meeting are not required.
• If the company's other lenders propose an inter-creditor agreement (ICA), holders also vote on whether to sign it.

A majority here means not less than 75% of holders by value and 60% by number. So a small holder is bound by what the majority votes. SEBI's investor guide puts the risk plainly: the issuer "may not be able to pay back the money you've lent them".

This is an illustration with an assumed rate, not an offer or a forecast. Say ₹2,00,000 sits in one NCD paying 9% a year, or ₹18,000 before tax. If the company stops paying after the first year, you have received ₹18,000. What comes back of the ₹2,00,000 depends on the security, the holders' vote and the recovery process. You may get back less than you lent, or nothing, and recovery can take a long time.

Each issuer also keeps a Recovery Expense Fund with the stock exchange, set at 0.01% of the issue size up to ₹25 lakh. That fund pays the trustee's enforcement and legal costs. It does not repay holders.

What is the difference between secured and unsecured NCDs?

A secured NCD has a charge on company assets that SEBI requires to cover at least the full principal and interest, and the debenture trustee watches that this cover is kept up. An unsecured NCD has no assets set aside for you.

Even so, the offer document has to carry a warning. Although the debenture is secured to the tune of 100% of principal and interest, recovering all of it "shall depend on the market scenario prevalent at the time of enforcement of the security". The offer document's term sheet states whether the NCD is secured or unsecured.

How do you buy corporate bonds and NCDs?

You can apply in a company's public issue of NCDs, or buy listed bonds on the stock exchange through a broker. In both cases they sit in your demat account, the electronic account that holds them. A listed bond is one traded on a stock exchange, and a stock broker is the SEBI-registered intermediary who places your orders. A public issue takes applications for two to ten working days. You apply through your broker, your bank or the exchange's app. The money is blocked in your account, not taken, using UPI for applications up to ₹5 lakh or through your bank.

NCDs are allotted in the order applications arrive until the day the issue is oversubscribed, and proportionately from then. They are listed within three working days of the issue closing.

SEBI defines a retail individual investor as someone bidding up to ₹2 lakh. Some issues offer extra interest to retail individual investors and to groups such as senior citizens or women, only to the first allottee.

Bonds first sold privately are different. SEBI sets their face value, the amount printed on one bond, at ₹1 lakh, or ₹10,000 for some plain bonds. The trading lot equals the face value, so you buy these in blocks of ₹10,000 or ₹1 lakh. This does not apply to public issues.

An online bond platform provider (OBPP) is a website or app that sells bonds. Its orders go through the stock exchange's request for quote (RFQ) platform and settle through the clearing corporation, which completes the trade.

Why should a very high interest rate make you look twice?

SEBI's own investor guide says companies with poor credit ratings may offer higher coupons "to offset the higher risk involved". So a rate far above other bonds is the price of a bigger chance that you are not repaid.

Read a platform banner showing "up to 13–14%" that way. The "up to" figure is the top rate on the shelf, and by SEBI's explanation the bond paying the most is making up for the highest risk. It is not a typical bond's rate.

SEBI does not let platform advertisements rest on projections. They must warn that debt securities are "subject to risks including delay and/ or default in payment".

Before you look at the yield, which is the return a bond works out to for you, ask these questions:

• What is the rating, and what reasons does the rating agency give?
• Is the NCD secured or unsecured, and is it listed?
• Who is the debenture trustee, and what risk factors does the offer document list?
• Is the platform on the register of online bond platform providers?

How do you check that a bond platform is registered with SEBI?

Look the platform up on the list of online bond platform providers linked from SEBI's website. That page links the NSE and BSE lists. Each entry shows the platform's SEBI registration number and website.

A registered platform is a stock broker in the debt segment, approved by NSE or BSE as an OBPP. It may sell only listed bonds, bonds in a public issue, government securities and a few other regulated products, never unlisted bonds. A platform that sells unlisted bonds, or is not on the lists, is not acting as a registered OBPP.

SEBI warned on 19 November 2025 that some entities offer bond platform services without registration. Such platforms lack regulatory oversight and offer no investor protection or complaint mechanism, and SEBI told investors to check registration first and deal only with registered entities.

For each bond, a registered platform must show:

• the issuer, and whether the bond is listed secured or listed unsecured
• the rating, the rating agency and its reasons
• face value, prices, coupon and maturity date
• the debenture trustee
• the current yield and yield to maturity, with how each was calculated
• the offer documents

Read them.

Corporate bonds or a corporate bond fund: what is the difference?

With a single bond, your money rides on one company until maturity or until you find a buyer on a thin market. A corporate bond fund spreads money across many borrowers under SEBI's limits, and you can sell your units back to the fund house.

A debt fund is a mutual fund that lends money by buying bonds and similar paper from governments, banks or companies. SEBI sets rules for three categories that hold company bonds:

• Corporate bond funds must keep at least 80% in bonds rated AA+ and above.
• Credit risk funds must keep at least 65% in bonds rated AA and below, excluding AA+.
• Banking and PSU funds must keep at least 80% in bonds of banks, public sector undertakings, public financial institutions and municipal bodies.

Mutual funds may buy only investment-grade securities. For active schemes other than credit risk funds, SEBI caps one issuer at 10% of the fund for AAA, 8% for AA and 6% for A and below, measured at purchase. Prior approval from the trustees and the fund house board allows up to 2% more. Funds still carry credit risk and can lose money.

If a bond in the fund is downgraded below investment grade or defaults, the fund house may, with the trustees' approval, move it into a separate segregated portfolio. Unitholders on the day of the downgrade or default get as many units in it as they hold in the fund, and share any later recovery. Our article on side pocketing in mutual funds explains it.

On 29 September 2026, most listed corporate bond funds read Moderate on the riskometer, SEBI's risk label, and most credit risk funds read Moderately High. Sale money arrives within three working days. For units bought on or after 1 April 2023, gains from selling a debt fund are taxed at your slab rate. No TDS is cut on a resident's redemption gains.

Koshex offers corporate bond, banking and PSU and credit risk funds as regular plans, the version of a fund bought through a distributor such as Koshex. Koshex is an app run by an AMFI-registered mutual fund distributor. It reviews your holdings over time and flags changes, such as a fund's category, risk or ranking shifting. See corporate bond funds, credit risk funds, banking and PSU funds and the risks involved in mutual funds.